CHAPTER 5

Statement of Financial Position and

Statement of Cash Flows

LEARNING OBJECTIVES
1. Explain the uses and limitations of a statement of financial position.
2. Identify the major classifications of the statement of financial position.
3. Prepare a classified statement of financial position using the report and account formats.
4. Indicate the purpose of the statement of cash flows.
5. Identify the content of the statement of cash flows.
6. Prepare a basic statement of cash flows.
7. Understand the usefulness of the statement of cash flows.
8. Determine additional information requiring note disclosure.
9. Describe the major disclosure techniques for financial statements.
*10. Identify the major types of financial ratios and what they measure.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-1
CHAPTER REVIEW

*Note: All asterisked (*) items relate to material contained in the Appendix to the chapter.

1. Chapter 5 presents a detailed discussion of the concepts and techniques that underlie the
preparation and analysis of the statement of financial position. Along with the mechanics
of preparation, acceptable disclosure requirements are examined and illustrated. A brief
introduction to the statement of cash flows is also presented. This explanation serves as a
foundation for the more comprehensive discussion of this subject presented in Chapter 23.
At the end of Chapter 5, a multi-page illustration of the financial statements and
accompanying notes of a corporation is presented. This illustration may be referred to
throughout your study of intermediate accounting as it includes information relevant to
many of the topics discussed in subsequent chapters.

Statement of Financial Position

2. (L.O. 1) For many years financial statement users generally considered the income
statement to be superior to the statement of financial position as a basis for judging the
economic well-being of an enterprise. However, the statement of financial position can be a
very useful financial statement. If a statement of financial position is examined carefully,
users can gain a considerable amount of information related to liquidity, solvency, and
financial flexibility. Liquidity is generally related to the amount of time that is expected to
elapse until an asset is realized or otherwise converted into cash or until a liability has to
be paid. Solvency refers to the ability of an enterprise to pay its debts as they mature.
Financial flexibility is the ability of an enterprise to take effective action to alter the
amounts and timing of cash flow so that it can respond to unexpected needs and
opportunities.

3. Criticism of the statement of financial position has revolved around the limitations of the
information presented therein. These limitations include: (a) failure to reflect current fair
value information, (b) the extensive use of estimates, and (c) failure to include items of
financial value that cannot be recorded objectively.

4. The problem with fair value information concerns the reliability of such information. The
estimation process involved in developing fair value information causes a concern about
the objectivity of the resulting financial information. The use of estimates is extensive in
the development of statement of financial position data. These estimates are required by
IFRS, but reflect a limitation of the statement of financial position. The limitation concerns
the fact that the estimates are only as good as the understanding and objectivity of the
person(s) making the estimates. The final limitation of the statement of financial position
concerns the fact that some significant assets of the entity are not recorded. Items such
as human resources (employee workforce), managerial skills, customer base, and reputation
are not recorded because such assets are difficult to quantify.

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 5. (L.O. 2) The major classifications used in the statement of financial position are assets,
liabilities, and equity. These items were defined in the discussion presented in Chapter 2.
To provide the financial statement reader with additional information, these major
classifications are divided into several subclassifications. Assets are further classified as
non-current or current, with the non-current divided among investments; property, plant,
and equipment; intangible assets; and other assets. Liabilities are classified as non-
current or current. Equity includes share capital, share premium, and retained earnings.
These items are defined as follows:

Asset. Resource controlled by the entity as a result of past events and from which future
economic benefits are expected to flow to the entity.

Liability. Present obligation of the entity arising from past events, the settlement of which is
expected to result in an outflow from the entity of resources embodying economic benefits.

Equity. Residual interest in the assets of the entity after deducting all its liabilities.

6. Items classified as long-term investments (or simply investments) in the assets section
of the statement of financial position normally are one of four types. These include:

a. Investments in securities, such as ordinary shares, bonds, or long-term notes.

b. Investments in tangible assets not currently used in operations (land for speculation).

c. Investments set aside in special funds (sinking, pension, plant expansion, etc.).

d. Investments in non-consolidated subsidiaries or associated companies.

7. Companies group investments in debt and equity securities into three separate portfolios
for valuation and reporting purposes.

a. Held-for-collection. Debt securities that a company manages to collect contractual

principal and interest payments. Individual securities are classified as non-current or
current, depending on circumstances.

b. Trading. Also referred to as fair value through profit or loss securities. Debt and
equity securities bought and held primarily for sale in the near term to generate
income on short-term price changes. They are reported at fair value and are current
assets.

c. Non-trading equity. Certain equity securities held for purposes other than trading,
like meeting legal or contractual requirements. They are reported at fair value.
Individual securities are classified as non-current or current, depending on
circumstances.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-3
 8. Property, plant and equipment are tangible properties of a durable nature that are used
in the regular operations of the enterprise. Examples include land, buildings, machinery,
furniture, tools, and wasting resources. With the exception of land, these assets are either
depreciable or depletable.

9. Intangible assets lack physical substance and are not financial instruments; however,
their benefit lies in the rights they convey to the holder. Examples include patents,
copyrights, franchises, goodwill, trademarks, trade names, and customer lists.

10. Limited-life intangible assets (such as patents) are amortized over their useful lives.
Indefinite-life intangibles (such as goodwill) are not amortized but, instead, are assessed
at least annually for impairment.

11. Many companies include an “Other Assets” classification in the statement of financial
position after Intangible Assets. This section includes a wide variety of items that do not
appear to fall clearly into one of the other classifications. Some of the more common
items included in this section are: long-term prepaid expenses, prepaid pension cost,
non-current receivables, assets in special funds, and restricted cash or securities.

12. Current assets are cash and other assets expected to be converted into cash, sold, or
consumed either in one year or in the operating cycle, whichever is longer. There are
some exceptions to a literal interpretation of the current asset definition. These exceptions
involve prepaid expenses, available-in-sale securities, and the subsequent years’
depreciation of fixed assets. These exceptions are recognized in the accounting process and
are understood by most financial statement users. Current assets normally include
inventories, receivables, prepaid expenses, short-term investments, cash and cash
equivalents. Their basis of valuation are:

a. Inventories. Reported at the lower-of-cost-or-net-realizable value and the cost flow

assumption (FIFO or weighted-average) is disclosed.

b. Receivables. Reported at their net realizable value. Major categories of receivables

should be shown in the statement of financial position or the related notes.

c. Prepaid Expenses. Reported at their unexpired or unconsumed cost.

d. Short-term Investments. Includes trading securities and held-for-collection and non-

trading equity securities that will mature or be sold within twelve months or the normal
operating cycle, whichever is longer. Held-for-collection securities are reported at
amortized cost. Trading and non-trading equity securities are reported at fair value.

e. Cash and Cash Equivalents. Includes currency and demand deposits. Cash
equivalents are short-term, highly liquid investments that will mature within three
months. Cash and cash equivalents are reported as approximating fair value. Any
restrictions or commitments related to the availability of cash must be disclosed.

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13. The Equity (also referred to as Shareholders’ Equity) section is difficult to prepare and
understand because of the complexity of capital share agreements, restrictions on equity
imposed by corporation law, liability agreements, and boards of directors. It consists of six
parts.

a. Share capital. The par or stated value of shares issued. It includes ordinary shares
and preference shares.

b. Share premium. The excess of amounts paid-in over the par or stated value.

c. Retained earnings. The corporation’s undistributed earnings. It may be divided between

the unappropriated and restricted amounts.

d. Accumulated other comprehensive income. Also referred to as reserves or other

reserves, includes such items as unrealized gains and losses on non-trading equity
securities and unrealized gains and losses on certain derivative transactions.

e. Treasury shares. The amount of ordinary share capital repurchased.

f. Non-controlling interest (Minority interest). A portion of the equity of subsidiaries

not owned by the reporting company.

14. Non-current liabilities are obligations whose settlement date extends beyond the normal
operating cycle or one year, whichever is longer. Examples include bonds payable, notes
payable, lease obligations, and pension obligations. Generally, the disclosure require-
ments for long-term liabilities are quite substantial as a result of various covenants and
restrictions included for the protection of the lenders. Long-term liabilities that mature within
the current operating cycle are classified as current liabilities if their liquidation requires
use of current assets. Long-term liabilities generally fall into one of the three following
categories:

a. Obligations arising from specific financing situations, such as the issuance of bonds,
long-term lease obligations, and long-term notes payable.

b. Obligations arising from the ordinary operations of the company such as pension
obligations and deferred income tax liabilities.

c. Obligations that depend on the occurrence or non-occurrence of one or more future

events to confirm the amount payable, or the date payable, such as product warranties
often referred to as provisions.

15. Current liabilities are the obligations that are reasonably expected to be settled either
through the use of current assets or the creation of other current liabilities. Items normally
shown in the current liabilities section of the statement of financial position include notes
and accounts payable, advances received from customers, current maturities of long-term
debt, taxes payable, and accrued liabilities. Obligations due to be paid during the next
year may be excluded from the current liability section if the item is expected to be
refinanced through long-term debt or the item will be paid out of non-current assets.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-5
16. Working capital is the excess of current assets over current liabilities. This concept,
sometimes referred to as net working capital, represents the net amount of a company’s
relatively liquid resources. By reference to this amount, a financial statement user is able to
assess the entity’s margin of safety for meeting financial demands of the operating cycle.
While the amount of working capital has a definite relationship to liquidity, the reader must
analyze the composition of the current assets to determine their nearness to cash.

17. (L.O. 3) IFRS do not specify the order or format in which a company presents items in the
statement of financial position. The account format of a classified statement of financial
position lists assets by sections on the left side and liabilities and equity by sections on
the right side. The report format lists equity and liabilities directly below assets on the
same page.

Statement of Cash Flows

18. (L.O. 4) The primary purpose of a statement of cash flows is to provide relevant
information about the cash receipts and cash payments of an enterprise during a period.
The statement of financial position, income statement, and statement of changes in equity
do not provide a convenient source of information on cash flows.

19. (L.O. 5) In accomplishing its purpose, the statement focuses attention on three different
activities related to cash flows.

a. Operating activities involve the cash effects of transactions that enter into determination
of net income.

b. Investing activities include making and collecting loans and acquiring and disposing
of debt and equity investments and property, plant, and equipment.

c. Financing activities involve liability and owners’ equity items and include (1) obtaining
resources from owners and providing them with return on their investment and
(2) borrowing money from creditors and repaying the amounts borrowed.

The basic format of the statement of cash flows is shown below.

Statement of Cash Flows

Cash flows from operating activities................... RXXX

Cash flows from investing activities................... XXX
Cash flows from financing activities................... XXX
Net increase (decrease) in cash......................... XXX
Cash at beginning of year.................................. XXX
Cash at end of year............................................ R$XXX

20. The statement’s value is that it helps users evaluate liquidity, solvency, and financial
flexibility. Liquidity refers to the “nearness to cash” of assets and liabilities. Solvency is
the firm’s ability to pay its debts as they mature. Financial flexibility is a company’s
ability to respond and adapt to financial adversity and unexpected needs and
opportunities.

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21. (L.O. 6) The information to prepare the statement of cash flows comes from three sources:
(a) comparative statement of financial position, (b) the current income statement, and
(c) selected transaction data. Preparation of the statement of cash flows involves the
following steps.

a. Determine the cash provided by (or used in) operating activities.

b. Determine the cash provided by (or used in) investing and financing activities.

c. Determine the change (increase or decrease) in cash during the period.

d. Reconcile the change in cash with the beginning and the ending cash balances.

The information included in this chapter on the preparation of the statement of cash flows
provides a basic introduction to the concepts involved. A complete and detailed presentation
of the statement of cash flows is found in Chapter 23 of the text.

22. (L.O. 7) Creditors look for answers to the following questions in the company’s cash flow
statement:

a. How successful is the company in generating net cash provided by operating activities?

b. What are the trends in net cash flow provided by operating activities over time?

c. What are the major reasons for the positive or negative net cash provided by operating
activities?

23. The formula to calculate the current cash debt coverage ratio is:

Net Cash Provided Average Current Cash

÷ =
by Operating Current Debt
Activities Liabilities Coverage Ratio
24. The formula to calculate the cash debt coverage ratio is:

Net Cash Provided Average Total Cash Debt

÷ =
by Operating Liabilities Coverage Ratio
Activities
25. Free cash flow is the amount of discretionary cash flow a company has for purchasing
additional investments, retiring its debt, purchasing treasury stock, or simply adding to its
liquidity as follows:

Net Cash Provided (Capital

– = Free Cash Flow
by Operating Expenditures
Activities + Dividends)

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-7
Additional Information

26.(L.O. 8) Companies must provide comparative information in addition to the current year’s
financial statements, i.e., two complete sets of financial statements and related notes.
The notes to the financial statements can provide supplemental data of a quantitative
nature to expand the information in the financial statements and explain restrictions
imposed by financial arrangements or basic contractual agreements.

27. Generally the first note to the financial statements is a Summary of Significant Accounting
Policies. The IASB recommends disclosure for all significant accounting principles and
methods that involve selection from among alternatives or those that are peculiar to a
given industry.

28. In addition, IFRS require many specific disclosures concerning such items as property,
plant, and equipment, receivables, inventories, employee benefits, and equity capital and
reserves. Companies are also required to reconcile the balances of many assets and
liabilities reported in the financial statements from the beginning of the year to the end of
the year.

29. (L.O. 9) Effective communication of the information required to be disclosed in financial

statements is an important consideration. Accountants have developed certain methods
that have proven useful in disclosing pertinent information. The methods are parenthetical
explanations, cross reference and contra items, and adjunct accounts. Numerous
examples of the techniques of disclosure are presented in the text. These examples
should be reviewed as they represent concepts referred to in subsequent chapter
material.

30. Other important issues related to the presentation of information in the financial
statements include offsetting, consistency, and fair presentation. Offsetting is not
permitted unless a specific IFRS permits it. As a part of comparability, the Framework
requires that companies follow consistent principles and methods from one period to the
next. Companies must present fairly the financial position, financial performance, and
cash flows of the company. It is presumed that the use of IFRS with appropriate
disclosure results in financial statements that are fairly presented.

*31. (L.O. 10) Appendix 5A Ratio Analysis—A Reference demonstrates various ratios used
to analyze financial performance and examine trends and relationships between financial
statement items.

a. Liquidity ratios: measure a company’s ability to pay its maturing obligations.

b. Activity ratios: measure how effectively a company uses its assets.

c. Profitability ratios: measure the degree of success or failure of a company or division

for a given period of time.

d. Coverage ratios: measure the degree of protection for long-term creditors and
investors.

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LECTURE OUTLINE

It should be emphasized that this chapter is a review chapter and the intent is to provide
an overview for topics that will be dealt with in greater detail in later chapters.

As a review of Chapters 4 and 5, we recommend that you encourage students to examine

a set of actual financial statements and the accompanying notes. Appendix 5-B in the text
contains specimen financial statements for the Marks and Spencer Group.

The material in the chapter can be covered in two class sessions. The first session can be
used for lecture on the concepts covered in the chapter. Most students should have had
previous exposure to these concepts. The first session can also be used for reviewing some of
the shorter problem material such as Exercises 5-1 through 5-4 and Cases 5-1 through 5-3.
You may wish to call upon students for their answers to the items in these cases and
exercises. Most items are straightforward, but some of them will stimulate class discussion and
highlight areas of misunderstanding.

The second class session can be used for final review and for going over the longer problem
material. This material allows students to apply chapter concepts by critiquing and preparing
financial statements.

The following lecture outline is appropriate for the chapter.

A. (L.O. 1) Usefulness of the Statement of Financial Position.

1. Provides information about entity’s assets, liabilities, and equity.
2. Evaluation of liquidity, solvency, and financial flexibility.
3. Aids in assessing risk and predicting future cash flows.

B. Limitations of the Balance Sheet.

1. Fair value is not reflected, since most assets and liabilities are reported at historical
cost.
2. Estimates and judgments must be utilized:

a. in determining the collectibility of receivables.

b. in assessing the salability of inventory.
c. in determining the useful lives of long-term assets.

3. Omits many items that are of financial value to the business.

a. Assets such as the value of a company’s human resources and research and
development are not reported because a company cannot record them
objectively.

b. Some liabilities or commitments such as leases and certain contractual arrange -

ments are reported in an “off balance sheet” manner.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-9
C. (L.O. 2) Classifications in the statement of financial position. Review definitions of the
elements on text page 2-13.
1. Assets.

2. Liabilities.

3. Equity.

D. Major Subclassifications in the statement of financial position: Non-current assets.

1. Long-term investments—management intent is to hold these investments for an

extended period of time.

a. Investments in securities: bonds, common stock, long-term notes.

b. Investments in tangible assets not currently used in operations: land held for
speculation.
c. Investments set aside in special funds: sinking funds, pension funds, plant expansion
funds.

d. Investments in non-consolidated subsidiaries or associated companies.

e. Types of investment portfolios used for valuation and reporting purposes:

(1) Held-for-collection: debt securities that a company manages to collect

contractual principal and interest payments; classified as current or non-
current asset, depending on circumstances.

(2) Trading: debt and equity securities bought and held for sale primarily in the
near term to generate income on short-term price changes; reported at fair
value and classified as current asset.

(3) Non-trading equity: certain equity securities held for purposes other than
trading, like legal and contractual requirements; reported at fair value and
classified as current or non-current asset, depending on circumstances.

2. Property, plant, and equipment—tangible long-lived assets such as land, buildings,

machinery, furniture, and “wasting resources” (timberland, minerals) used in operations.

a. Most assets in this category are either depreciable (e.g., buildings) or consumable
(e.g., minerals). Land is not depreciated. However, land improvements are
depreciated.

b. Long-lived costly tools are usually included in this category. In practice, small tools
are frequently expensed when purchased or are included as inventoriable current
assets.

c. The basis of valuation (e.g., historical cost or fair value), any liens against the
property, and accumulated depreciation or depletion must be disclosed.

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 d. In practice, a detailed classification of property, plant, and equipment is disclosed
in a supplementary schedule rather than on the face of the statement of financial
position.

3. Intangible assets—resources that lack physical substance and are not financial
instruments but provide economic rights and advantages.
a. Examples include patents, franchises, copyrights, goodwill, trademarks, trade names,
and customer lists.
b. Usually a high degree of uncertainty exists regarding realizability of future benefits.
c. Limited-life intangible assets are amortized over their useful lives and reported
net of the accumulated amortization.
d. Indefinite-life intangible assets, such as goodwill, are not amortized but are
assessed periodically for impairment.
e. Expenditures for intangible assets, such as most R & D and internally-developed
goodwill, are not capitalized but are expensed as incurred.

4. Other assets—a special classification for unusual items that cannot be included in
one of the other asset categories.
a. Examples include long-term prepaid expenses, non-current receivables, and prepaid
pension cost.
b. Some items included in this category should be classified elsewhere.

5. Current assets.

a. Resources which are expected to be turned into cash, sold, or consumed within a
year or the operating cycle, whichever is longer. (Point out the distinction
between the operating cycle and the accounting cycle.)
b. Conceptual weaknesses in the classification of current assets:
(1) Prepaid expenses will neither be turned into cash nor used to pay a current
liability. Discuss the justification for including them in current assets.
(2) Consumption of fixed assets during the current period: conceptually, the
current depreciation and amortization charges should be classified as current
assets, analogous to the “currently maturing portion of long-term debt.”
c. Items included in the current asset section include:
(1) Inventories—the basis of valuation (e.g., lower-of-cost-or-net realizable
value), cost flow assumption (e.g., FIFO or average cost), and stage of
completion of manufactured inventories should be disclosed.

(2) Receivables—the amounts of expected uncollectible accounts, nontrade

receivables, and accounts pledged or discounted must be disclosed.

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 (3) Prepaid expenses—expenses prepaid beyond the current operating cycle are
reported in the “other asset” section.

(4) Short-term investments—a company should report trading securities

(whether debt or equity) as current assets. Individual non-trading
investments should be classified as current or non-current,
depending on the circumstances. It should report held-for-
collection (sometimes referred to as held-to-maturity) securities at
amortized cost. All trading securities are reported at fair value.

(5) Cash—any cash restricted for purposes other than current obligations is
excluded from current assets. Cash equivalents are short-term highly liquid
instruments that mature within three months or less.

6. Equity—difficult to prepare and understand. Divided into six parts.

a. Share capital. The par or stated value of shares issued. It includes ordinary
shares and preference shares.

b. Share premium. The excess of amounts paid-in over the par or stated value.

c. Retained earnings. The corporation’s undistributed earnings. It may be divided

between the unappropriated and restricted amounts.

d. Accumulated other comprehensive income. Also referred to as reserves or

other reserves, includes such items as unrealized gains and losses on available-
for-sale securities and unrealized gains and losses on certain derivative
transactions.

e. Treasury shares. The amount of ordinary share capital repurchased.

f. Non-controlling interest (Minority interest). A portion of the equity of subsidiaries

not owned by the reporting company.

7. Non-current liabilities.

a. Definition: Obligations that a company does not reasonably expect to liquidate

within the longer of one year or one normal operating cycle.

b. Three types:

(1) Obligations arising from specific financing situations where additional assets
are acquired: issuance of bonds, long-term lease obligations, long-term notes
payable.

(2) Obligations arising from ordinary operations of the company such as pension
obligations and deferred income tax liabilities.

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 (3) Obligations that depend on the occurrence or non-occurrence of one or more
future events to confirm the amount payable, or the payee, or the date payable
(e.g., service or product warranties).

c. Any premium or discount on bonds payable is disclosed separately as an addition

to or subtraction from the bonds.

d. The currently maturing portion of long-term debt is classified as a current

liability. Theoretically, any related premium or discount should also be reclassified
as current.

e. Supplementary information that is usually disclosed in separate schedules includes

the existence of debt covenants and restrictions and the terms of the debt such as
maturity dates, interest rates, and amounts of any securities pledged to support
the debt.

8. Current liabilities.

a. Definition: Obligations that the company reasonably expects to settle within its
normal operating cycle or one year, whichever is longer.

b. Examples:

(1) Payables resulting from the acquisition of goods and services: accounts
payable, salaries and wages payable, income taxes payable.

(2) Collections received in advance for the delivery of goods or performance of

services: unearned rent revenue, unearned subscriptions revenue.

(3) Other liabilities whose liquidation will take place within the operating cycle or
one year, such as the portion of bonds to be paid in the current period, short-
term obligations arising from purchase of equipment.

c. Generally, notes payable, accounts payable, or short-term debt are listed first, and
income taxes payable or other current liabilities are listed last.

d. Some liabilities that will be paid within a year are reported as long-term liabilities.
These include:

(1) short-term debt expected to be refinanced.

(2) debt that will be retired out of noncurrent assets (alternatively, both the debt
and the assets could be classified as current).

e. Working capital is a measure of a firm’s ability to meet its currently maturing

obligations.

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 Working capital = Current assets minus current liabilities.

E. (L.O. 3) Statement of financial position format.

1. Account form.

2. Report form.

F. Statement of Cash Flows.

1. (L.O. 4) Purpose of the statement.

a. To provide information about the cash receipts and cash payments of an entity
during a period.

b. To achieve this, the statement reports on the operating, investing, and financing
activities of the business.
2. The statement is useful because it provides answers to the following important
questions:

a. Where did cash come from?

b. What was cash used for?

c. What was the change in the cash balance?

3. (L.O. 5 and 6) Classification of cash flows.

a. Operating activities. The cash flows connected with the determination of net

income.

b. Investing activities. The cash flows connected with purchasing and selling

investments and property, plant, and equipment and making and collecting loans.

c. Financing activities. The cash flows connected with borrowing and repaying

amounts borrowed, selling stock, and paying cash dividends.

4. Significant noncash transactions.

a. All significant financing and investing activities must be disclosed in a separate,

note to the financial statements, even though cash is not affected.

b. Examples of transactions that must be disclosed:

(1) conversion of bonds to common stock.

(2) acquisition of property through issuance of stock or through exchange for

other property.

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 5. Investing activities and financing activities.

Investing Activities Financing Activities

Sale of property, plant, and equipment Issuance of equity securities
Sale of investments in other entities Issuance of debt
Collection of loans to other entities Payment of dividends
Purchase of property, plant and equipment Redemption of debt
Purchase of investments in other entities Reacquisition of share capital
Loans to other entities

6. Chapter 23 discusses preparation of the statement of cash flows in detail.

G. (L.O. 7) Usefulness of the statement of cash flows:

1. Information on the statement is used to evaluate financial liquidity and financial

flexibility.

2. Analysis of net cash provided by operating activities includes:

a. Current cash debt coverage: used to determine if a company can pay off its cur-
rent liabilities from its operating activities in a given year.

b. Cash debt coverage: used to determine if a company can repay all of its liabili-
ties from its operating activities, without liquidating operational assets.

c. Free cash flow: used to determine the discretionary cash flow a company has for
additional investments, debt retirement, treasury stock, or adding to its liquidity.

H. (L.O. 8) Notes to the financial statements.

1. Summary of Significant Accounting Policies

2. Disaggregated information about:

(a) Property, plant, and equipment, with related accumulated depreciation.

(b) Receivables.

(c) Inventories

(d) Provisions.

(e) Equity capital and reserves.

I. (L.O. 9) Techniques of Disclosure.

Copyright © 2018 John Wiley & Sons, Inc.   Kieso Intermediate: IFRS 3e, Instructor’s Manual 5-15
 1. Parenthetical explanations (example: “net of tax” calculations in Chapter 4).

2. Notes (example: accounting policies and contingencies).

3. Cross-reference and contra items (example: bond discounts).

4. Other guidelines.

a. Offsetting

b. Consistency

c. Fair presentation

J. (L.O. 10) APPENDIX 5-A. Ratio Analysis.

1. Used to express the relationships between selected financial statement data.

2. Can be classified as:

a. Liquidity ratios: measure the short-run ability to pay maturing obligations.

b. Activity ratios: measure the effectiveness of asset usage.

c. Profitability ratios: measure the success or failure of a firm for a given period of

time.

d. Coverage ratios: measure the degree of protection for long-term creditors and

investors.

5-16 Copyright © 2018 John Wiley & Sons, Inc.   Kieso, Intermediate: IFRS 3e, Instructor’s Manual